Nonfinancial and financial performance measures: How do they affect employee role clarity and performance?

Two recent studies have found that comprehensive performance measurement systems comprising both financial and nonfinancial measures (e.g., balanced scorecard) are positively related to managerial performance through role clarity. It is, however, unclear if these results are from the use of financial measures or from the use of nonfinancial measures. It is also unclear if these effects are achievable by using nonfinancial measures alone. This study provides insights into prior studies' findings by distinguishing those effects arising from nonfinancial measures from those arising from financial measures. Based on a sample of 121 managers, the results indicate that nonfinancial measures, by themselves, significantly influence managerial performance through role clarity. More importantly, they also indicate that the effect of nonfinancial measures on role clarity is substantially stronger than that through financial measures.     

How do different performance measures affect managerial time orientation? Empirical evidence from sales managers in the oil and gas industry

This study investigates the relative effect of performance measures on managerial time orientation. We collect survey data on the actual time allocation of sales managers for tasks that affect financial performance on the short-, medium-, and long-term horizons. In addition, we obtain survey data on the specific metrics used by an oil and gas firm and classify them into three groups: traditional accounting (gross margin and budgeted costs), nonfinancial (market share and sales volume), and accounting returns (economic value added — EVA). Based on partial least-squares analysis, our results suggest that, in our setting, both nonfinancial and accounting return measures can supplement traditional accounting metrics to mitigate potential short-term orientation by inducing sales managers to consider mainly not only sales tasks but also investing tasks, which will affect the firm results more than a quarter ahead. In addition, our results imply that accounting return metrics are not better than nonfinancial measures in inducing a longer-term orientation in our research setting.     

Aligning Performance Measurement Systems With Strategy: The Case of Environmental Strategy

Alignment of an organization's performance measurement system with its strategy is widely advocated as a guiding principle in management control system design. Despite its importance, it is far from clear what strategic alignment of performance measures entails, whether and how organizations achieve it. In this article we explore the alignment of performance measures focusing on firms' use of environmental performance indicators as the consequence of pursuing an environmental strategy. Based on the economic and contingency literatures on management control system design and performance measurement, we propose that the use of such performance measures is a consequence of changing the design of the performance measurement system to accommodate the strategy, and by increasing the informativeness of performance metrics. We test these propositions in a sample of financial managers in manufacturing firms in The Netherlands. We find that alignment to environmental strategy is mostly achieved through the increased quantification of environmental performance measures and via their increased sensitivity to managerial actions.     

Changes in the measurement of fair value: Implications for accounting earnings

With the FASB's issue of staff position papers in 2009 and the relaxation of how fair value standards are applied, there has been a change in the practice of how fair value is measured. Since the FASB staff position papers in 2009, fair value measurement by financial institutions has increasingly relied on managerial assumptions. This study examines the impact of this change on the quality of earnings. Consistent with attribute substitution theory that emphasises reliability over relevance, we find that an apparent increase in managerial discretion in fair value measurement is associated with a higher probability of earnings management and lower earnings informativeness. The results indicate that allowing more managerial discretion in fair value measurement adversely affected the quality of financial reporting. Our study highlights the issue of reliable measurement in the debate among academics and practitioners of increasing the use of fair value accounting.     

Accountants for the Public Interest: strategy implementation and performance measurement for a nonprofit organization

This case describes strategic issues and the operations of Accountants for the Public Interest (API), a national organization that is dedicated to making volunteer accounting services available to financially disadvantaged individuals and nonprofit organizations. API is a well-known nonprofit organization that receives financial support from the accounting profession. In addition to discussing strategic decisions facing API, the case covers performance measurement topics commonly integrated in managerial and cost accounting courses. API's Board of Directors (BOD) must make important strategic planning and implementation decisions during a period of change. One Board member has suggested using performance measures to assess API's progress in implementing strategy and achieving goals. Students are asked to develop financial and nonfinancial measures relevant to API's strategy and to show how their suggested measures would appear in a balanced scorecard. Whether CPAs should be obligated to provide volunteer accounting services to the community is another issue that the case requires students to address.     

The effects of nonfinancial and financial measures on employee motivation to participate in target setting

Recent interest in nonfinancial performance measures has raised questions on how such measures influence employee reactions and behaviour. Surprisingly, the question of whether and how nonfinancial measures motivate employees to participate in target setting has remained largely unexplored. Employees can be motivated intrinsically or extrinsically to participate in target setting. Intrinsic motivation to participate in target setting initiates from within the employee and is perceived as an end in itself with the employee as the main beneficiary. In contrast, controlled extrinsic motivation to participate in target setting is controlled by the organization and is perceived as a means to an end with the organization as the main beneficiary. This study investigates the relative importance of nonfinancial measures vis-à-vis financial measures in engendering employee intrinsic and controlled extrinsic motivation to participate and how these two forms of motivation to participate in target setting translate into improved employee job performance. Based on a sample of 149 employees, the Partial Least Squares results indicate that both financial measures and nonfinancial measures are associated with employee intrinsic motivation to participate in target setting. However, only nonfinancial measures are associated with controlled extrinsic motivation to participate in target setting and because this form of motivation to participate is controlled by the organization as a means to achieve better performance, it is only this form of motivation which has a significant impact on employee job performance. These results provide important insights into the intricacies by which performance measures influence employee motivation to participate in target setting and job performance.     

The Information Content of Nonfinancial Performance Measures in the Airline Industry

This research extends the literature on nonfinancial performance measures (NFPMs) by assessing (1) the information content of a broader set of NFPMs and (2) whether NFPMs provide information not provided by financial performance measures (FPMs) from all previously identified FPM categories, rather than just earnings and book value. Specifically, exploratory and confirmatory factor analysis results presented in this paper demonstrate that nineteen NFPMs of major airlines capture seven underlying constructs not captured by eighteen common FPMs. Additionally, this research develops reliable composite measures of the identified performance measure constructs, which prior research argues are superior to individual performance measures.     

On the Optimal Relation between the Properties of Managerial and Financial Reporting Systems

We develop a theoretical model of the firm that links properties (stewardship vs. valuation focus) of financial reporting regimes with the informational properties of optimal managerial accounting systems. We show that, contrary to the standard textbook proposition, properties of management and financial accounting systems are not independent. Significantly, we provide an explicit connection between exogenous and observable properties of a firm's financial reporting system and the quality of the managerial accounting system on which manager(s) base real economic decisions. As the quality of those economic decisions can also be inferred from publicly available data, our theory generates new opportunities for empirical managerial accounting research on large nonproprietary samples. Further, by being able to identify enhanced performance due to improved managerial accounting information, our theory provides opportunities to gain a better understanding of the link between particular managerial accounting practices and the quality of the information produced.     

Financial and nonfinancial performance measures: How do they affect job satisfaction?

Recent interest on the use of nonfinancial measures (e.g. in the Balanced Scorecard) generally assumes that such measures are essential to overcome the inadequacies of financial measures. However, it remains unclear (1) if the behavioural effects of these nonfinancial measures are different from those of financial measures; and (2) whether these effects are influenced by the relative importance of nonfinancial measures vis-à-vis financial measures. This study hypothesises that the use of performance measures for performance evaluation will significantly affect managers' job satisfaction. However, these effects are indirect through the managers' perceptions of the fairness of these measures and the interpersonal trust these measures promote. Based on a sample of 70 managers, these expectations are supported by the results. More importantly, the results also suggest that (1) the process by which nonfinancial measures affect employee job satisfaction is not different from that of financial measures, and (2) the relative importance of nonfinancial measures vis-à-vis financial measures has no significant effect on employee job satisfaction. These results may have important theoretical and practical implications.     

The effect of measurement timing on the information content of customer satisfaction measures

We use two sets of customer satisfaction measures obtained from a homebuilding company to examine the effect of measurement timing on the association between customer satisfaction measures and future financial performance. The research site employs two separate consulting firms that measure customer satisfaction at different times from the same homebuyer population. A national consulting firm captures customer satisfaction at a fixed time in the year following purchase (the “NF” measure), whereas an industry-focused, boutique consulting firm captures customer satisfaction at three specific points in time (30 days, 5 months, 11 months) after purchase (the “BF” measures). We analyze data for the period 2002–2004 and have the following findings: first, customers’ satisfaction varies over a homebuyer's consumption period. Comparing across the three BF measures, we find that on average a homebuyer is most satisfied 30 days after purchase and least satisfied 11 months after purchase. Second, we compare the NF measure with the BF measures and find significant differences in their predictive abilities for future financial performance. The BF measures are significant leading indicators of future financial performance, as measured by higher revenues and profits and lower warranty costs, but the NF measure is not. Additional analyses indicate that the relatively higher predictive ability of the BF measures is due to the more precise timing of those measures, rather than differences in measurement content. Finally, we find that the point of diminishing returns to improvements in customer satisfaction varies across customer satisfaction measures obtained at different points in the consumption period. We conclude that timing has a significant impact on the information content of customer satisfaction measures, at least for goods and services that are consumed over extended period of time.     

Choice and change of measures in performance measurement models

This paper uses management control, resource-based, systems-based and contingency-based strategy theories to describe a large U.S. manufacturing company's efforts to improve profitability by designing and using a performance measurement model (PMM). This PMM includes multiple performance measures relevant to its distribution channel for products, repair parts and maintenance services. The PMM is intended to reflect the company's understanding of performance relations among strategic resources, operational capabilities, and desired financial outcomes. The PMM also reflects its intended distribution strategy, the types of performance necessary to achieve that strategy by its distributors, and its desired financial outcomes. Furthermore, the company uses the model to evaluate its North American distributors and intends to use these evaluations as a partial basis for annual and long-term rewards. Thus, the PMM embodies the measurable portion of the firm's management control system of its distribution channel.The study addresses four research questions: (1) Are measure attributes important considerations for performance measure choice? (2) Does the importance of attributes differ according to firm strategy? (3) Does the importance of attributes for design and use differ according to firm strategy? (4) Does a company trade-off some individual attributes for others? The questions are investigated using qualitative and quantitative analyses of archival documents and interviews with top managers and distributors. Principal findings are that measure attributes are important considerations for choice and change of performance measures, design attributes are more important than use attributes, the importance of attributes does not appear to differ according to strategy, and some individual attributes are traded-off for other attributes.     

The Roles of Performance Measures and Monitoring in Annual Governance Decisions in Entrepreneurial Firms

This paper analyzes annual corporate governance decisions at firms making initial public offerings (IPOs) of common stock between 1996 and 1999. Our objective is to examine relations between firms' corporate governance decisions and the informativeness of available measures of managerial performance. We consider financial measures such as earnings and stock return, as well as direct monitoring. We collect a sample of IPO firms from the manufacturing, Internet, and technology (non-Internet) industries, and examine how the use of various performance measures in annual compensation grants and turnover decisions varies with the information environment of the firm and with the extent of venture capital influence. Consistent with prior research that finds earnings are of limited usefulness in firm valuation for Internet firms, we find Internet firms place less importance on earnings and greater importance on stock returns in determining compensation grants than do non-Internet firms. We also find that compensation grants of firms with little or no venture capital influence display significantly stronger association with accounting and stock performance measures than those of firms with more intense monitoring by venture capitalists. This result is consistent with direct monitoring and the use of explicit performance measures acting as substitute governance mechanisms.     

Nonfinancial performance measures,externalities and target setting: A comparative case study of resolutions through planning

This paper presents an analysis of the resolution of organisational externalities through the use of nonfinancial performance measures for planning. Using a comparative case study, this paper illustrates how centralised controllers’ choice of nonfinancial performance measures and target setting in two companies provides critical information to decentralised agents regarding how to balance their performance with the performance of other decentralised agents in their organisation. This work complements current management accounting research in that it focuses on the role of nonfinancial performance measures with respect to the design of performance plans for decentralised agents that can be used to internalise externalities. To date, discussions of externalities in management accounting research have primarily focused on how performance measurements can be used as a price mechanism to provide decentralised agents with incentives to internalise externalities. In addition, this case study illustrates some of the difficulties related to acquiring general knowledge about the externalities of nonfinancial performance measures and, therefore, about whether specific nonfinancial performance measures are appropriate for a particular type of organisation.     

Corporate governance and the information environment: Evidence from state antitakeover laws

We examine the relation between corporate governance and firms' information environments. We use the passage of state antitakeover laws in the U.S. as a source of exogenous variation in an important governance mechanism to identify changes in firms' information environments. We find that information asymmetry and private information gathering decreased and that financial statement informativeness increased following the passage of the antitakeover laws. Cross-sectional analyses indicate that the increased level of financial statement informativeness is attributable to firms that are most likely to access equity markets rather than managerial entrenchment, managerial career concerns, or managers' pursuit of the quiet life.     

A LONGITUDINAL STUDY OF CHANGE IN THE ENGLISH NATIONAL HEALTH SERVICE

This paper reports the findings of a longitudinal comparative case study of three National Health Service (NHS) hospital Trusts in England, investigating the perceptions of clinical, managerial and accounting professionals towards changing cost accounting and performance measurement practices. It incorporates both qualitative and quantitative data analysis, and is based on a contextualist understanding of change management, utilising the content‐process‐context approach (Pettigrew and Lapsley, 1994) to investigate the influence of receptive versus non‐receptive contexts on change. The analysis reveals limited success in improving performance measurement practices (the content of change) in Trusts. Nevertheless the specific context within which change was operationalised was found to be very important, with central mangers playing a key role in influencing change. The process of change indicated slow shifts in clinical‐accountant‐managerial relations, partly driven by changes in financial flows within the organisations.     

Does fair value accounting contribute to market price volatility? An experimental approach

This paper contributes to the debate on the impact of accounting measurement rules for financial assets. We examine the association between fair value accounting for financial assets and market price volatility for nonfinancial firms in an experimental setting. One group of participants was provided with financial statements where held‐for‐trading securities were reported at fair market value (FVA). Another group received financial statements with investments reported at historical cost (HCA). Controlling for accounting data, we find no systematic difference between FVA and HCA for three different measures of market price volatility, despite higher earnings volatility and marginally heavier trading under FVA.     

财务会计的本质、特点及其边界

为了指明财务会计的本质特点 ,我认为财务报表是财务报告的中心部分 ,而报表附注、其他财务报告等传送财务信息方法仅是次要的手段。在财务报表上确认的任何项目 ,都必须符合可定义性、可计量性、相关性与可靠性的特征。会计程序包括计量、记录和报告都必须以确认为基础。因此 ,财务报表的信息可以按真实和公允的要求来描述财务业绩和现金流量。财务会计的基本职能既不试图提供可能的未来的信息 ,又不产生非财务信息。财务会计的主要目的是通过它的报表反映一个企业经济活动及其结果的真实图像。结论 :财务会计作为一门学科是历史科学 ;作为一项实务是一个信息系统 ,它的任务是为企业提供历史的财务信息。     

Coming up short on nonfinancial performance measurement

Companies in increasing numbers are measuring customer loyalty, employee satisfaction, and other nonfinancial areas of performance that they believe affect profitability. But they've failed to relate these measures to their strategic goals or establish a connection between activities undertaken and financial outcomes achieved. Failure to make such connections has led many companies to misdirect their investments and reward ineffective managers. Extensive field research now shows that businesses make some common mistakes when choosing, analyzing, and acting on their nonfinancial measures. Among these mistakes: They set the wrong performance targets because they focus too much on short-term financial results, and they use metrics that lack strong statistical validity and reliability. As a result, the companies can't demonstrate that improvements in nonfinancial measures actually affect their financial results. The authors lay out a series of steps that will allow companies to realize the genuine promise of nonfinancial performance measures. First, develop a model that proposes a causal relationship between the chosen nonfinancial drivers of strategic success and specific outcomes. Next, take careful inventory of all the data within your company. Then use established statistical methods for validating the assumed relationships and continue to test the model as market conditions evolve. Finally, base action plans on analysis of your findings, and determine whether those plans and their investments actually produce the desired results. Nonfinancial measures will offer little guidance unless you use a process for choosing and analyzing them that relies on sophisticated quantitative and qualitative inquiries into the factors actually contributing to economic results.     

The performance measurement manifesto

The leading indicators of business performance cannot be found in financial data alone. Quality, customer satisfaction, innovation, market share--metrics like these often reflect a company's economic condition and growth prospects better than its reported earnings do. Depending on an accounting department to reveal a company's future will leave it hopelessly mired in the past. More and more managers are changing their company's performance measurement systems to track nonfinancial measures and reinforce new competitive strategies. Five activities are essential: developing an information architecture; putting the technology in place to support this architecture; aligning bonuses and other incentives with the new system; drawing on outside resources; and designing an internal process to ensure the other four activities occur. New technologies and more sophisticated databases have made the change to nonfinancial performance measurement systems possible and economically feasible. Industry and trade associations, consulting firms, and public accounting firms that already have well-developed methods for assessing market share and other performance metrics can add to the revolution's momentum--as well as profit from the business opportunities it presents. Every company will have its own key measures and distinctive process for implementing the change. But making it happen will always require careful preparation, perseverance, and the conviction of the CEO that it must be carried through. When one leading company can demonstrate the long-term advantage of its superior performance on quality or innovation or any other nonfinancial measure, it will change the rules for all its rivals forever.